Why KPIs do not work?

Why KPIs do not work?

Key performance indicators (KPIs) in many organizations are a broken tool. Measures are often a random collection prepared with little expertise, signifying nothing. KPIs should be measures that link daily activities to the organization’s critical success factors (CSFs), thus supporting an alignment of effort within the organization in the intended direction.

Here are some myths I have discussed in my book Key Performance Indicators: Developing, Implementing, and Using Winning KPIs (third edition).
You can purchase the book including free electronic template downloads from amazon.com or click here.
Myth: By Tying KPIs to Remuneration You Will Increase Performance

It is a myth that the primary driver for staff is money and that an organization must design financial incentives in order to achieve great performance. Recognition, respect, and self-actualization are more important drivers. In all types of organizations, there is a tendency to believe that the way to make KPIs work is to tie KPIs to an individual’s pay. But when KPIs are linked to pay, they create key political indicators (not key performance indicators), which will be manipulated to enhance the probability of a larger bonus.

KPIs should be used to align staff to the organization’s critical success factors and will show 24/7, daily or weekly how teams are performing. They are too important to be manipulated by individuals and teams to maximize bonuses. KPIs are so important to an organization that performance in this area is a given, or as Jack Welch says, “a ticket to the game.” Performance bonus schemes are often flawed on a number of counts. The balanced scorecard is often based on only four perspectives, ignoring the important environment and community and staff satisfaction perspectives. The measures chosen are open to debate and manipulation. There is seldom a link to progress within the organization’s CSFs. The damage done by such schemes is only found out in subsequent years.

Myth: You Can Delegate a Performance Management Project to a Consulting Firm

For the past 15 years or so many organizations have commenced performance measure initiatives, and these have frequently been led by consultants. Commonly, a balanced-scorecard approach has been adopted based on the work of Kaplan and Norton. The approach, as I will argue, is too complex and leads to a consultant-focused approach full of very clever consultants undertaking this exercise with inadequate involvement of the client’s staff. Although this approach has worked well in some cases, there have been many failures. The winning KPIs methodology clearly states, “You can do this in-house.” If you cannot, no one else can.

KPI projects are in-house projects run by skilled individuals who know the organization and its success factors. They have been unburdened from the daily grind to concentrate on this important project. In other words, these staff members have moved their family photographs, the picture of the 17-hand stallion or their beloved dog, and put them on their desks in the project office. Leaving the daily chore of firefighting in their sphere of operations to their second-in-charge who has now moved into the boss’s office, on a temporary basis of course!

Myth: All Measures Can Work Successfully in Any Organization, At Any Time

Contrary to common belief, it is a myth to think that all measures can work successfully in any organization, at any time. The reality is that there needs to be, as Spitzer has so clearly argued, a positive “context of measurement” for measures to deliver their potential. To this end I have established seven foundation stones that need to be in place in order to have an environment where measurement will thrive. These seven foundation stones are:
1. Partnership with the staff, unions, and third parties
2. Transfer of power to the front line
3. Measure and report only what matters
4. Source KPIs from the critical success factors
5. Abandon processes that do not deliver
6. Appointment of a home-grown chief measurement officer
7. Organization-wide understanding of winning KPI definition

For more of my research on these myths, download chapter 2 of my book here.

The Dark Side of KPIs

Myth: Most Measures Lead to Better Performance

Every performance measure can have a negative consequence or an unintended action that leads to inferior performance. Well over half the measures in an organization may well be encouraging unintended negative behavior. In order to make measures work, one needs to anticipate the likely human behavior that will result from its adoption, and endeavor to minimize the potential negative impact. KPIs are like the moon, they have a dark side. It is imperative that before a measure is used the measure is:
• Discussed with the relevant staff: “If we measure this, what will you do?”
• Piloted before it is rolled out.
• Abandoned if its dark side creates too much adverse performance.

Performance-Related Pay

The biggest culprit in unintended behavior has to be around performance-related pay. Never in the history of management has so little rigor been applied in such an important area. Performance bonuses give away billions of dollars each year based on methodologies to which little thought has been applied. Performance-related pay is broken both within the private sector and government and nonprofit agencies. Jeremy Hope puts it beautifully
in this quote:
…But despite hundreds of research studies over 50 years that tell
us that extrinsic motivation (carrot and stick financial targets
and incentives) doesn’t work, most leaders remain convinced that
financial incentives are the key to better performance.”

Jeremy Hope went on to say that performance-related pay remains one of the greatest barriers to transforming organizations. Bonus Schemes Should Not Be Linked to KPIs Performance-related pay schemes should not be linked to KPIs. KPIs are a special performance tool, and it is imperative that these are not included in any performance-related pay discussions. KPIs, as defined in Chapter 1, are too important to be gamed by individuals and teams to maximize bonuses. Performance with KPIs should be, as mentioned
in Chapter 2, considered a “ticket to the game” and not worthy of additional reward. Although KPIs will show how teams are performing 24/7, daily, or weekly, it is essential to leave the KPIs uncorrupted by performance related pay. As mentioned in Chapter 2, it is a myth that by tying KPIs to pay you will increase performance. You will merely increase the manipulation of these important measures, undermining them so much that they will become Key Political Indicators.

Bonus Schemes Should Not Be Linked to the Balanced Scorecard

The balanced scorecard has been manipulated whether it is tied to annual performance bonus or not. As Spitzer says, “The ultimate goal is not the customer—it’s often the scorecard.” Spitzer has heard executives, when being candid, saying, “We don’t worry about strategy; we just move our numbers and get rewarded.” There are a number of foundation stones that need to be laid down and never undermined when building a performance bonus scheme.

For more information on the dark side of KPIs, download chapter 3 of my book here which also includes a Dysfunctional Performance Measures Checklist.